Common sources of success or failure of start-up firms
Introduction
The vision of starting an enterprise is held by a lot of people; nevertheless, not many of them make it to have start-up, more so fewer start "promising" firms (Bhide, 2000). What is dissimilar in relation to those who begin promising companies? The response proposed here is an "entrepreneurial style" which comprises of cognitions and behaviours which had been put forwarded independently in entrepreneurship, management, and social cognition study as secluded predictors of individual success in challenging surroundings (e.g., risk, high uncertainty, urgency, inadequate personal resources and surprise threats and opportunities. However, many businesses that are started by different entrepreneurs fail due to different reasons. The question then is: why are numerous small start-up companies failing? With this study, we begin to detail this research project that aims at investigating the efficacy of small start-up business in various fields of commerce. In this study, we will address the following exploratory study question
• What are the industry and firm-specific factors which relate to the success and failure of small start-up businesses? What are the relative strengths of these factors in determining business survival?
Relationship of Entrepreneurial idea to Subsequent enterprise Start-up
New enterprises get started and also develop during their earlier stages mostly based on the actions and thinking of individuals who have ideas, visions or dreams, of their intended conception (Bird, 1992). Information regarding the composition, basis and effects of ideas has been mostly developed through leadership researchers, and because entrepreneurship is management in a new product/ organization/ market setting (Bhide, 2000), management knowledge concerning vision illuminates this theory.
Leadership researchers elucidate that vision is a proposed mental reflection of what a leader would like to accomplish (Bhide, 2000) it is a brave audacious overarching objective, (Agarwal and Gort, 1996) and it is a main forecaster of captivating behaviour (House & Shamir, 1993). Vision mirrors the leaders cognitions in regards of values and forethought (Simon, et al 2000)and it shows motivation, which is an element of social cognition theorys "willingness" writing (Shepherd et al., 2000)
Literature review
In formulating theoretical framework for this research, we shall review earlier research done on the success and failure of companies. We shall also discuss several specific issues which relate to the failure or success of enterprises from the existing literature.
Entrepreneurs are faced with risk, uncertainty, urgency, resource scarcity (human and financial), and surprise threats and opportunities as they build new markets, upset established markets, and create new organizations (Shepherd et al., 2000) Consequently, information to direct entrepreneurs expectations concerning new marketing strategies and organizational results is limited or even not existent. Except when intellectual property is given protection, competitive benefits possibly could be temporary while substitutes or competitors emerge; quick decisions and action are normally required for success of a business (Simon, et al 2000) In addition, not many entrepreneurs have adequate financial resources to obtain all facilities, process structures, equipment, and human capital professionals; and, very few can sustain start-up losses alone. (Simon, et al 2000)
Success failure analysis
Using the practice of survival analyses, Audretsch and Mahmood (Audretsch and Mahmood, 1991, 1995) found that new start- up business success is linked to both industry-and enterprise-specific characteristics.
First, start-up enterprises are more possibly to survive in industries which are characterized with an entrepreneurial management, where new comes to the market boast with technological innovation advantages over the existing (Audretsch and Mahmood, 1995). On contra, in an industry which has a controlled technological management, where existing firms have advantages as innovators, it becomes harder for new start-ups to survive.
Secondly, company-specific characters for instance start-up size and structure of ownership can also have an influence on survivability of the business. Companies with a huge start-up size are more probable to survive in the market. In addition Audretsch and Mahmood (1995) found out that new start-ups which are independent firms appear to have elevated risk rates (i.e., greater probability of failing with time, than new branches of already existing firms. (Simon, et al 2000)
Likewise, Agarwal and Gort (1996) found out that success rates for new start-ups are industry particular, however in relation to the development phase of the industry. Their results imply new start-ups bear higher risk rates when an industry in its early phrases.
Hensler, et al (1997) analyzed success time for initial public offerings (IPOs) of stock. They did found that factors like the firm size, age of the company at the offering, the opening return on capital in the stock issue, the amount of IPOs occurring in market, and ownership can enhance the success time for IPO firms. On contra, a high average price standard in the stock market at the period of IPO and a high number of hazard characteristics linked to the firm results in reduced survival period. Hensler et al.(1997) also found an industry consequence in their findings, with IPOs in the computer, wholesale, airline and restaurant, industries showing a shorter survival period and companies in the pharmaceutical or optical industries enjoying a longer survival period. (Hensler et al, 1997)
Honjo (2000) conducted two studies regarding failure of new manufacturing companies in Japan as from 1986 to 1994. One study was based on the age of the company and the other study on the calendar period. Honjo (2002) found that, whilst financial resources and size of the company are both important predictors of enterprise failure when they are included into the concept independently, financial capital is the only significant upon adding them into the concept at the same moment. Honjo concluded that past research which finds noteworthy effects connected with size of the company, in effect, be possibly capturing the effects of the monetary capital. His findings also show that firms established just prior to a crash of market or a market bubble or just following a market crash are most likely to fail. In the study based upon calendar period, Honjo found a positive correlation linking age and failure, and a negative correlation linking age-squared and company failure. Besides, his findings point out that a higher rate of entry and high geographical concentration of an industry results to a high risk rate for companies (Honjo, 2002)
Based upon our literature review of the regarding business failure, we recognize the following two main factors as forecasters of the success rate of a firm:
Industry-specific characteristics; these comprises the rate of new start-up/ business entry, growth of industry as measured via price-cost margin, and technological management of the industry.
Firm-specific characteristics; These consist of financial investment, cash flow mechanism, start-up size, post-entry company size, founding period, the firm ownership and whether the company is a new start-up or the a branch of an existing business
Failure/ success factors of start-up ventures
Factors affecting success or failure of start-up ventures could be classified into three main groups:
(1) Personal character of the entrepreneur;
(2) Strategies and resource means of the new business itself;
(3) Environmental conditions of a start-up (House& Shamir; 1993; Bruno& Tyebjee; 1985)
Entrepreneurs personal characters
A lot of studies reveal that age, level of education and work experience are connected to the success rate of start-up ventures. Nonetheless the effect of these variables upon the venture failure appears to be inconclusive. For instance, in relation of entrepreneurs age, the advantages from the amassed knowledge related to age and those from the vigour and freeness to new inspirations related to youth seem to coexist (Bruno & Tyebjee,1985) Non-experienced founders of new ventures are most likely to follow a strategy of learning through actions which could lead them to prone to mistake (Hitt & Tyler,1991)However there is opposite argument that entrepreneurs experience standard is less significant to increase survival probability of start-up (Hitt & Tyler,1991; Hensler et al.1997)
Some studies also argue that higher education level of entrepreneur contributes to greater success rate of small start-up firms (Bruno & Tyebjee,1985) Although the contrary arguments also exist that successful entrepreneurs usual have lower level of education compared failed entrepreneurs (Samuelsson, 2001; Hitt & Tyler,1991) For the entrepreneurs psychological attribute, want for success was stressed which makes entrepreneurs be committed to their business uncomplainingly (Samuelsson, et al (2001) Entrepreneurs commitment and also efforts to their start-up business could make a contribution to improve the success potential of start-up ventures. It has been also asserted that, entrepreneurs who have higher risk undertaking tendency could attain higher monetary performance (Hitt & Tyler, 1991; Hensler et al.1997) Bhide, (2000) made an observation that entrepreneurs of failed start-up ventures in Korean high-tech firms were older by age and had lower education levels and more experience of management previous to their start-ups. The study also revealed that, they had low levels of risk taking tendency.
a) Passionate behaviour
One of the significant determinants of failure or success in a start-up company is the passionate behaviour of their founders. Individuals who lack passion frequently draw on the first obstacle they run into as a pretext for failure. While individuals who have got high passion will undertake all means to ensure that he/she overcomes those barriers. (Bird, 1989)
What one can accomplish in life depends upon several things: how hard one works, how smart one works, how much influence one has on the work he/she does, and how much bravery one has in pursuing his/her goals. How hard one works is tied to how passionate one is. One major variation between American and Japanese companies, or European companies, lies in the fact that, in the U.S. companies are a lot more generous in offering stock alternatives to their employees. When a company distribute its ownership to its employees, the employees act differently. Employees no longer act like employees but act like owners. Extensive shareholder ownership is among the best ways of stimulating passionate behaviour in employees who will ensure that the company is able to achieve its set targets and objects and thus succeed. (Hitt & Tyler, 1991)
Strategy and Resource Capabilities:
Many studies suggest that start-up ventures ought to focus on small and niche market first (Porter, 1980). Particularly establishing the niche market during the early phase can make them good profits and enhance success chances of small star-up ventures (Bird, 1989)
(Hensler et al. 1997) Competitive marketing strategies in the chosen market must also be influential to success rates and performance of start-up. Some empirical researches indicated that cost leadership strategy is correlated negatively with the technology performance based start-ups (Bird, 1989). Mainly, the cost leadership strategy may not be perfect for technology based start-ups which try to market innovative products that are based on the high-tech technology. Marketing differentiation strategy that is based on design, brand image, thorough advertising and packaging could set off the failure possibility, as young start-ups business are not well equipped with enough resources needed to implement this strategy. In addition, as they might not completely create the reliability and common trust among the various stakeholders who includes the customers (Bruno & Tyebjee, 1985; Shepherd et al., 2000) too much aggressive marketing strategy is also most likely to fail.
On the contra, empirical studies indicated that differentiation strategy which is focused on innovative and better quality products and good services is a definite approach of getting competitive advantages for many start-up ventures particularly the technology centred ventures in competition with large established companies (Hisrich, 1990) revealed that start-up firms that fail pursue lower stratum of market segmentation with high levels of marketing differentiation strategy. This implies that spreading of resource and competency over a broad market is risk to start-up and small ventures while excessive investment of capital on marketing differentiation might lead to the exhaustion of resources and also competences (Shepherd et al., 2000).
Research shows that among many factors in strategic management that are required for a start-up business to succeed the following are most important
• Investors
• Investment timing
• Management teams
• Human resources
Not many people start their business with the above factors well covered, this in many times leads to the business not being able to perform well. (Hitt & Tyler, 1991; Shepherd et al., 2000)
a) Investors
A lot of entrepreneurs are unconcerned in relation to source of investment of their new ventures. They centre on how much capital they can be able to raise and how many shares, while they do not distinguish among the quality of the sources of the capital. However the quality of financiers and the rate at which capital flows into the start-up company are keys to its success. Apart from cash, financiers can also offer significant influence. (Little & Rhodes, 1991)
Another important determinant factor of success for start-up businesses is their enterprising capitalists and if they can grant sufficient access to more capital downstream. Start-up businesses typically require more capital than the entrepreneurs may think, and they many times fail for the reason that they run out of capital rather than because the technology had problems. Start-up businesses that have investors with "fat wallets" will succeed more frequently. For instance, Venrock -that invests the Rockefeller family capital, is one of the highly successful venture capital companies, partly because it has extremely "fat wallets" and thus has the staying clout to assist make sure the success of firms in which it invests.
Figure 1. Scenario A invests a small amount of money over a long period in hopes of a positive return. The more aggressive Scenario B ignores the short-term savings in favor of long-term gains.
Figure 1; Scenario A invests a little amount of capital over a long time in hopes of a good return. A more aggressive scenario B overlooks the short-range savings in favour of long-term returns.
b) Investment timing
The timing of investing in a start-up is equally crucial. Figure 1 (above) illustrates two dissimilar investment situations, with the net cash flow as a function of time. Whilst the net cash flow is negative, then the entrepreneur is investing money; but once the net cash flow is positive, the he is making a return over investment. Curve "A" shows the plan of investing a small amount of capital into a business over a long period and being hopeful it turns positive. Curve A has two main problems connected with it. One; management more often takes too much time in raising capital in small amounts instead of increasing the business. Two, it creates a big window of opening for a competitor undertaking the B curve to forcefully enter and capture the market. (Roberts, 1991)
For incremental advancements, nonetheless, they take on the B curve, particularly if the period to breakeven is not more than two years. The rationale is that many shareholders review public companies on a moderately short-term period perspective, usually 6 to 18 months. Supposing the management team which is driven by short-period behaviour has a far-reaching innovation that may take five years to reach the payback level, it will cut any capital investment from the optimal B curve down wise to the A curve. All the area stuck between these two curves after breakeven is long-period lost opportunity, but since management is being based on the short period, it will make a lot of money in the short period by fewer assets. (Roberts, 1991)
c) Management teams
Too many entrepreneurs who underestimate the requirement for excellent management, they should know that its better to have a first-class management team having an average technology rather than have a first-class technology and a second-class management team since a strong management team is most likely to succeed. Another false impression concerning entrepreneurship is the fact that it is a personal behaviour. Studies show that entrepreneurial behaviour succeeds a lot more when performed through teams. (Brown-2004)
The chairman of the MIT Entrepreneurship Centre, Edward Roberts of the Sloan School, has spent more than 30 years researching the likelihood of success for start-up business. Roberts found out that success increases considerably with the size of the team until you get four or five entrepreneurs starting the firm. Teams of individuals with corresponding skills do perform better. For instance, if someone who understands the capital markets partners with a technologist and another individual who understands how to sell technology-based items, the team of these three will have a higher possibility of success compared to a solitary technologist attempting to start off a company on his/her own. Studies reveals that first-class managers hire a first-class team however second-class managers shun hiring at their class and hire third-class-rated.
d) Human resources
Some studies argue that the success or failure of a start-up business is connected to human capital factor and also financial factors at the beginning of the start-up phase (Roberts, 1991;Porter,1980; Simon, Houghton & Aquino, 2000) In Particular high power of net worth in the midst of net capital at the an earlier stage of the new venture can contribute to improving financial stability and success chance, whereas highly depending on debt is most likely to make the new ventures face serious hardships from financial bankruptcy. Getting competent and professional human resources is often mentioned as a crucial element in a start-up business success or failure (Simon, Houghton & Aquino, 2000; Moore, 1999) since it plays a critical function in development of inventive products and services.
Moreover, getting resources from external is very vital to start-up ventures with inadequate internal resources. Particularly the ability of getting funds is widely acknowledged as essential to the success and growth of start-up ventures. In addition outside technical resources are very imperative to core technological benefit in technology cantered young small firms. (Shepherd et al., 2000) It was shown by (Simon, Houghton, & Aquino, 2000) that, a start-up business venture is likely to fail when it has a significantly low level of intensity of total net value, to total capital as opposed to those who succeed. This implies that poor capital arrangement contributes to business failure. (Utterback, 1994)
Selecting the right stakeholders; managers, workers, and financiers, is one significant aspect of creating a successful start-up business. However a new enterprise has got to also take particular steps to convey its pioneering product to the market. How well it undertakes these activities, plays an equally significant function to the companys success or failure.
Environmental Conditions:
In order for a new business venture to survive and develop, start-up organization must attain social legitimacy together with resources from outer environment through adapting to the needs from the institutional surroundings (Hosmer, and Lemeshow, 1999) In some countries, the national government have established special laws for promoting business ventures that generate more fostering environments favourable to sustenance of business ventures. (Hosmer, and Lemeshow, 1999; Moore, 1999) Financial outlay of venture capital firms not only offers financial capital and management knowledge to the start-up ventures but also do provides legitimacy. Institutional environments such governmental policies and supports from venture capital companies have a significant influence on increasing the survival potential of new and young ventures.
A number of studies on the relationship among environmental characteristics and success of start-up business argue that environmental competitiveness and also uncertainty have a negative impact on the success rate. Since the rate of change of technologies or products and the amount of competition are higher, they must consider more factors and have higher levels of failure rates (Agarwal and Gort, 1996). Nonetheless other studies have an opposite observation on the effect of environmental competitiveness and uncertainty. Since organizational environment is ever changing and complex, the possibilities of the freeness of new markets and probability of the business growth could increase (Utterback, 1994) In addition firms may be more inventive to have competitive dominance and attain relatively low cost in competitive and changing circumstances. These efforts can make start-up ventures to enhance their survival possibility. (Agarwal and Gort, 1996)
Conclusion
Entrepreneurs establish new businesses are faced with risk, uncertainty, urgency, resource limitations both human and financial, and surprise, threats and opportunities as they build new markets, upset established markets, and create new organizations. Through using the practice of success analyses, forwarded by (Audretsch and Mahmood, 1991, 1995) found out that new start- up business success is related to both industry-and enterprise-specific features. These industry enterprise factors are further explained by House, R.J., & Shamir, B. (1993) who outlined three main factors which are, personal character of the entrepreneur; Strategies and resource means of the new business itself; and Environmental conditions of a start-up. This factor determines the success or failure of a start-up company depending on how they will be exploited. Both human and financial capital is quiet vital for the success of an enterprise. Start-up businesses typically require more capital than the entrepreneurs may think, and they many times fail for the reason that they run out of capital rather than because the technology had problems. Suitable first class management ensure proper skills and technology is utilized. Thus for any entrepreneur to built a successful enterprise he/she must observe the above outlined factors.
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